One of the most important questions facing states as they enter the online gaming fold is the proper tax rate for online gaming revenues. Striking a balance between maximizing tax revenues while encouraging reinvestment of corporate profits into expanded facilities and additional jobs can be difficult, and states will undoubtedly set different gaming tax rates, much as they already have for brick and mortar gaming. For example, Nevada taxes gaming revenues at 6.75% of gross gaming revenue ("GGR")—essentially gaming revenues less winnings paid to players, without adjustment for other expenses—while Pennsylvania imposes a staggering 55% GGR tax rate. Other states have sliding scale GGR tax rates, while many states (including Nevada) enhance GGR tax receipts with various licensing fees.

Ben Blair is a tax attorney with the large international law firm Faegre Baker Daniels. Although Blair's resume is impressive, it appears he erred in this assertion. Of course, in fairness to Blair, this solitary Tweet isolates his comment from the context of the panel discussion (NOTE: See new Update at end of this post for additional context for Blair's comment). However, this Tweet is a good jumping off point for consideration of a significant online gaming taxation issue—Must online gaming be taxed in the same manner and at the same rates as established brick and mortar gaming?

At first glance, the answer seems obvious. An online slot machine or poker game is essentially just a virtual version of a brick and mortar slot machine or poker game. So of course online gaming must be taxed in the same manner as brick and mortar gaming. Right?

Tax law, however, is much more complicated. Congress and state legislatures generally have wide latitude in setting tax policy. [FN1]. Obviously a tax law cannot discriminate based on a protected class—a law taxing women, Hispanics, or Rastafarians at a higher rate would be unconstitutional. Nor can a tax law favor in-state residents over similarly situated out-of-state residents. [FN2].

When a tax law draws distinctions between groups of people to further purely economic policies, however, courts usually show legislatures substantial deference. For example, Congress encourages home ownership through a law permitting deduction of mortgage interest and property taxes while not permitting deduction of rental expenses. Similarly, Congress encourages capital investment through lower tax rates for income from capital gains than income from employment. At a state legislative level, important local industries are often given preferential tax treatment, and specific companies are often granted favorable tax breaks to encourage those companies to move to or remain in a state, or to expand operations within a state. The U.S. Supreme Court has long permitted legislatures broad discretion in using tax laws to advance the legislatures' preferred economic policies, even if the result is a taxation scheme which plays favorites among individuals and companies, so long as the tax policy is not wholly arbitrary:

"The [Equal Protection Clause] imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of state taxation. The State may impose different specific taxes upon different trades and professions and may vary the rate of excise upon various products. It is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use or value."

Turning back to online gaming, could a legislature draw a permissible distinction between online gaming revenue and brick and mortar gaming revenue such that the two types of revenue could be taxed at different rates? Interestingly, the U.S. Supreme Court has already addressed a strikingly similar issue in the context of differential tax treatment for various types of traditional gaming facilities.

Back in 1994, Iowa's gaming industry was in significant economic distress. The state's racetracks were hemorrhaging money, while its riverboat casinos which offered traditional slot machines and table games were facing unexpected competition from newly authorized Illinois riverboats which did not have the same betting and loss limits and excursion requirements as were imposed on Iowa's riverboats. [FN4]. In response, the Iowa legislature enacted sweeping revisions to Iowa's gaming laws, permitting racetracks to offer slot machines while eliminating bet and loss limits for riverboat casinos.

An interesting provision in Iowa's gaming expansion laws related to taxation of gaming revenues. The legislature imposed a different tax rate on slot machine revenues depending on whether the revenue came from a racetrack (36% maximum tax rate) or a riverboat (20% maximum tax rate). The state's racetracks predictably filed suit, claiming the different tax rates for slot machine revenues violated constitutional equal protection guarantees, and placed them at an unfair economic disadvantage to the riverboats.

The legal challenge reached the Iowa supreme court in 2002. Racing Ass'n of Central Iowa v. Fitzgerald, 648 N.W.2d 555 (Iowa 2002) ("RACI-I"). The court noted that the state legislature was entitled to broad discretion in setting tax policy, but could not discriminate on an arbitrary basis. The court's analysis began with a consideration of whether racetracks and riverboats were "similarly situated" within the state's gaming economy; if not, then the legislature could set different tax rates for the different types of gaming businesses:

"[T]he heart of the tax statute is in its disparate treatment of the main activity taking place at both riverboats and racetracks. That is, the essence of the tax is that it treats racetrack slot machines differently than riverboat slot machines. Where the same activity is being taxed at significantly different rates, a mere difference in location is not sufficient to uphold the discriminatory tax.

Both facilities exist for the purpose of operating gambling games. The bulk of both entities' revenue is from slot machines.... If the bulk of their revenue was not based on slot machines, but rather we were called upon to determine whether horse revenue is different from gambling table revenue, our conclusion may be different. However, because most of the entities' revenue is derived from the same source, it is of little consequence that there are other different types of gambling games available at racetracks and riverboats. More importantly, both facilities are authorized to operate within the same gaming industry. Both operate slot machines that are the primary revenue-making vehicle for both facilities. Racetracks and riverboats serve gambling games to the same group of consumers. Both gaming facilities are equally important to the State in terms of revenue production. We conclude racetracks and riverboats are of the same class for purposes of this equal protection challenge. If the taxing statute treats them differently and there is no rational basis for such differential treatment, the statute violates equal protection."

The court then turned to the analysis of whether the legislature had a rational basis related to a legitimate policy purpose for taxing gaming revenues at different rates. This is a highly deferential standard of review, and courts almost never invalidate a law on such a "rational basis" review. Nonetheless, the RACI-I court (in a 4-3 split decision) found that "the effect of the tax is contrary to the legislative purpose of promoting agriculture and economic development" and the differential tax rate "frustrates the racetracks' ability to contribute to the overall economy of this state." The majority determined:

"[T]he inescapable conclusion is the differential tax is not rationally related to the main purpose of the legislation or to the intent behind authorizing racetracks to operate in this state. The stated purpose was allegedly to save the racetracks from economic distress. There can be no rational reason for this differential tax, unless the reason for it was to drive the racetracks out of business, thereby helping the riverboat industry. Unless we recognize the desire to discriminately tax one business for the purpose of supporting another similarly situated business as a legitimate government interest, we can find no other basis for upholding this law."

The State of Iowa appealed to the U.S. Supreme Court, which granted review. In a remarkably brief unanimous opinion, the Court reversed the Iowa supreme court, finding that the differential tax rate was constitutional under a rational basis review. Fitzgerald v. Racing Ass'n of Central Iowa, 539 U.S. 103 (2003) ("Fitzgerald"). The Court first observed that Iowa's legislature could have rationally enacted its gaming tax scheme to provide economic aid to riverboat casinos:

"[T]he 1994 legislation, seen as a whole, can rationally be understood to do what that court says it seeks to do, namely, advance the racetracks' economic interests. Its grant to the racetracks of authority to operate slot machines should help the racetracks economically to some degree—even if its simultaneous imposition of a tax on slot machine adjusted revenue means that the law provides less help than respondents might like. At least a rational legislator might so believe. And the Constitution grants legislators, not courts, broad authority (within the bounds of rationality) to decide whom they wish to help with their tax laws and how much help those laws ought to provide."

Fitzgerald, 538 U.S. at 108. Once the Court determined that the Iowa legislature may have intended to provide economic support to the riverboat casino industry, justifying the differential tax scheme was rather straightforward:

"Once one realizes that not every provision in a law must share a single objective, one has no difficulty finding the necessary rational support for the 20 percent/36 percent differential here at issue. That difference, harmful to the racetracks, is helpful to the riverboats, which, as respondents concede, were also facing financial peril. These two characterizations are but opposite sides of the same coin. Each reflects a rational way for a legislator to view the matter. And aside from simply aiding the financial position of the riverboats, the legislators may have wanted to encourage the economic development of river communities or to promote riverboat history, say, by providing incentives for riverboats to remain in the State, rather than relocate to other States. Alternatively, they may have wanted to protect the reliance interests of riverboat operators, whose adjusted slot machine revenue had previously been taxed at the 20 percent rate. All these objectives are rational ones, which lower riverboat tax rates could further and which suffice to uphold the different tax rates."

In an incredibly rare turn of events, however, the U.S. Supreme Court did not get the last word on Iowa's gaming tax laws. On remand to the Iowa supreme court, attorneys for the racetrack asked the court to reevaluate the laws under the state constitution's equal protection clause. [FN5]. The court did so, holding that the Iowa state constitutional right to equal protection was broader than the federal right to equal protection (an increasingly common practice known as "judicial federalism"). Under this broader state equal protection right, the court applied an elevated level of scrutiny of the legislature's tax scheme, utilizing what is often referred to as "rational scrutiny with a bite" analysis.

As it did in its first review of the tax scheme, a divided Iowa supreme court found that the scheme of differential tax rates for gaming revenue from racetracks and riverboats was arbitrary and not in furtherance of any legitimate legislative interest. Racing Ass'n of Central Iowa v. Fitzgerald, 675 N.W.2d 1 (2004) ("RACI-II"). In analyzing the statute, the RACI-II court considered and rejected the three major justifications for the tax scheme suggested by the U.S. Supreme Court: a) economic development of river communities; b) reliance interests of established riverboat casinos; and c) assisting the financial position of riverboat casinos.

The RACI-II court spent most of its analysis on the third justification—the different economic positions of the racetracks and riverboats. The court noted that a legislative study had concluded that racetracks might be marginally more profitable than riverboats, and suggested a racetrack tax rate of 24%. Nothing in the record, however, established an economic basis to support a tax rate of 36% for racetracks, a rate 80% higher than for riverboats. "[T]here was no credible factual basis for the legislature to believe that the racetracks would be able to pay nearly twice the amount of taxes as the excursion boats on the same amount of revenue." RACI-II, 675 N.W.2d at 14. In the end, the majority concluded:

"[T]he item taxed—gambling revenue—is identical. The higher tax rate is triggered by the location where such revenues are earned. Yet there is no legitimate purpose supported by fact that justifies treating one gambling enterprise differently than another based on where the gambling takes place, other than an arbitrary decision to favor excursion boats."

Despite the RACI-II court's split decision (where the minority—including current Chief Justice Mark Cady—indicated they would defer to the judgment of the legislature in setting tax policy), it is notable that the court did not declare that preferential tax treatment for riverboats would always be unconstitutional. Rather, the legislature had merely failed to establish a record for why a differential tax scheme was appropriate as a matter of policy in that particular situation.

C. Will Online Gaming Face Taxation Hurdles?

Based on the RACI v. Fitzgerald line of cases, it appears that legislatures wanting to tax online gaming revenues at a rate higher than brick and mortar casino revenues could likely do so with only minimal justification. Most state courts will not apply the more demanding analysis of the RACI-II court, and instead will follow the highly deferential approach of the Fitzgerald decision. But even for states where courts may take a deeper look, a few plausible justifications exist for imposing a higher tax rate on online gaming revenues:

Brick and mortar casinos create more jobs and have a greater economic and cultural impact than do online gaming sites, and thus should be given preferential tax treatment;

Because online gaming is more readily accessible, it exacerbates the social costs of gambling substantially more than does brick and mortar gaming, and thus the online gaming industry should pay for ameliorating those social costs (the "click your mouse, lose your house" argument); and,

Online gaming poses unique law enforcement and compliance risks related to fraud, theft, money laundering, and underage gambling that results in regulatory costs that should be borne by the online gaming industry.

Now, this is not to say that a state legislature will or must impose a higher tax rate on online gaming revenues. In fact, Nevada taxes online gaming at the same rate as brick and mortar gaming. Rather, the point is merely that state legislatures, tempted with a windfall of online gaming tax revenues, can likely find a legally sufficient basis for justifying a higher tax rate on online gaming revenues.

New Jersey is a prime example, taxing online gaming revenues at 15% of GGR, nearly double the 8% of GGR tax rate for brick and mortar casino gaming revenues. However, the primary justification for the New Jersey legislation legalizing online gaming is that it will be a new source of revenue that will not only save the economically troubled Atlantic City casinos, but allow them to compete against new casinos opening in neighboring states. This justification certainly passes the rational basis test set forth by the U.S. Supreme Court in Fitzgerald, and most likely passes the enhanced review described by the Iowa supreme court in RACI-II.A complicating factor for states like New Jersey—where established brick and mortar casinos are also the leading online gaming vendors—is that even if a higher tax rate is imposed for online gaming revenues, there likely will not be any party with standing willing to challenge the differential tax rate in court. Unlike in the RACI v. Fitzgerald case where the racetracks and riverboats were competitors, all New Jersey online gaming must occur under the auspices of established and licensed brick and mortar casinos in Atlantic City. Considering all of these casinos will be subject to the same tax rates for online gaming revenues, it is hard to imagine any of these casinos proving some kind of discrimination sufficient to establish an equal protection violation in court. And more to the point, when every online gaming operator is also operating a brick and mortar casino (or partnered with one), what casino will want to file a court challenge in the first place?

Even an online gaming affiliate with no brick and mortar operation—say a Party Gaming or PokerStars—would not likely wish to incur the political and legal fallout of a court challenge to an online gaming tax scheme when their corporate goals are primarily focused on gaining access to the American online gaming market, increasing online gaming market share, and expanding into additional states. Rocking the boat with a lawsuit would likely be viewed as counterproductive, particularly when tax costs can be passed along to customers in a variety of ways.D. Conclusion—Online Poker Players Are Threatened by High Tax Rates for Legalized Online GamingThere is no question that high tax rates for online gaming could easily destroy online poker as a viable profit-making activity for many winning poker players, most notably through increased rake and reduction or elimination of rakeback or similar promotions. With most courts giving significant deference—in some cases, a rubber stamp—to legislative tax policy decisions, it is clear that the time to fight for reasonable online gaming tax rates is when online gaming is first being considered for legalization in any state. Once tax rates are set and gaming revenues are being allocated by legislatures to other budget priorities, the odds of reducing online gaming tax rates diminishes significantly.

Further, the problem of tax rates for online gaming revenues will only become more acute as states begin to form interstate compacts to expand the liquidity pool for online gaming (a key consideration for poker players). [FN6]. Imagine what will happen when a state like Pennsylvania with a high brick and mortar gaming tax rate (55%) authorizes online gaming and looks to enter into interstate gaming compacts. If Pennsylvania imposes the same 55% tax rate—or an even higher tax rate—on online gaming revenues, it is not too big a leap to assume other states in the same online gaming compact will increase their online gaming tax rates, even if they do not go nearly as high as Pennsylvania.

Of course, it is theoretically possible that a legislature could implement a different, lower tax structure for online poker than for online gaming (this is significantly more likely in states which adopt poker-only online gaming as a first step to full online gaming legalization). Such a poker-specific tax structure likely would pass muster in any court challenge, given the different economic dynamics of poker. But legislatures are highly unlikely to be willing to draw such distinctions, so poker players are likely better off simply advocating for lower tax rates for online gaming in general than trying to carve out special tax treatment for poker (particularly considering poker's lobbying influence is dwarfed by that of gaming industry heavyweights like major corporate and tribal casino interests). [FN7].

Legalization and regulation of online poker is a key step in the development and maturation of the American poker industry. Yet legalization may come at too high a cost for many poker players if appropriate and reasonable taxation is not a priority in the legislative process. As more states look at legalizing online gaming, poker players would be wise to keep an eye on taxation issues.

UPDATE (4 Dec. 2013; 10:15 a.m. CT): Noted tax and gaming law attorney Brad Polizanno who was another panel member with Blair messaged me that the context for Blair's comment was a reference to the Internet Tax Freedom Act (ITFA). Passed by Congress in 1998, the ITFA bans states from imposing taxes on internet access, and also imposes a moratorium on "multiple or discriminatory taxes on electronic commerce". The imposition of differential tax rates on online gaming as compared to brick and mortar gaming may arguably run afoul of the ITFA, which defines a "discriminatory tax" as:

any tax imposed by a State or political subdivision thereof on electronic commerce that--

(a) is not generally imposed and legally collectible by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means; [or]

(b) is not generally imposed and legally collectible at the same rate by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means ...

To date, there have not been any significant cases deciding the issue of when goods or services are sufficiently "similar" to invoke the protection of the ITFA. Obviously a book or article of clothing purchased online is similar (if not identical) to the same book or article of clothing purchased in a shopping mall. But when online "goods and services" are merely a virtual representation of a tangible item, the issue of similarity gets legally murky. The analysis likely would turn on how the question is framed. If the issue is whether online slot machines operate the same as physical slot machines, they likely will be considered "similar" for purposes of the ITFA. (Of course, online poker could arguably be considered as a different sort of game than live poker in ways that would not apply to slot machines.) If, however, the issue is framed as whether the online gaming experience is a service "similar" to the brick and mortar gaming experience, then there are distinct differences which might preclude a finding of similarity. The Washington supreme court in its Rousso decision has already rejected an argument that online gaming is the virtual equivalent of brick and mortar casino gaming; the Rousso analysis, however, was in the context of a Dormant Commerce Clause argument, and the court did not consider the ITFA.

Four important points about the ITFA should be kept in mind by poker players as they watch further developments of online gaming legalization. First, New Jersey legislators clearly felt comfortable enacting a major piece of legislation with a differential tax rate for online gaming. Though the New Jersey legislature may not ultimately be correct on the point, the legislature's action suggests that its legal counsel saw no conflict with the ITFA. Second, as noted earlier, it might well be difficult to find a company willing to bring a challenge to the differential tax rate, whether based on an equal protection or an ITFA violation. Third, even if an ITFA challenge is brought and is successful, the legislature could cure the ITFA defect by merely imposing the same, higher tax rate on all gaming revenues. Fourth and finally, the ITFA tax moratorium is a creature of federal policy. Currently, the ITFA tax moratorium is set to expire in November 2014, though Congress is likely to extend the ITFA tax moratorium in some fashion. However, any bill to extend the ITFA tax moratorium would create openings for changes in the law. Given recent litigation by Amazon.com and other online retailers seeking clarity on collection of state sales taxes, and with state governments looking for new streams of revenue, the ITFA tax moratorium will likely generate significant debate by various interest groups. The advent of online gaming and the prospect of multi-state online gaming compacts also makes online gaming taxation a likely point of discussion during the ITFA extension debate. In short, even if the ITFA applies to online gaming in its current form, there is no guarantee it will apply after November 2014.

[FN1] The U.S. Supreme Court has described the broad deference owed by courts to legislatures in the area of tax policy:

"The broad discretion as to classification possessed by a legislature in the field of taxation has long been recognized․ [T]he passage of time has only served to underscore the wisdom of that recognition of the large area of discretion which is needed by a legislature in formulating sound tax policies․ It has been pointed out that in taxation, even more than in other fields, legislatures possess the greatest freedom in classification. Since the members of a legislature necessarily enjoy a familiarity with local conditions which this Court cannot have, the presumption of constitutionality can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes․

No scheme of taxation, whether the tax is imposed on property, income, or purchases of goods and services, has yet been devised which is free of all discriminatory impact. In such a complex arena in which no perfect alternatives exist, the court does well not to impose too rigorous a standard of scrutiny lest all local fiscal schemes become subjects of criticism under [an equal protection analysis]."

[FN3] “Where the public interest is served one business may be left untaxed and another taxed, in order to promote the one, or to restrict or suppress the other.” Carmichael v. S. Coal & Coke Co., 301 U.S. 495, 512 (1937). "[I]t has repeatedly been held and appears to be entirely settled that a statute which encourages the location within the State of needed and useful industries by exempting them, though not also others, from its taxes is not arbitrary and does not violate [equal protection guarantees]." Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 528 (1959).

[FN4] As a college student in Iowa in the early and mid-1990s, I remember the days of going to a casino to play blackjack (poker rooms were not permitted at that time) with betting ranges from $1 per hand up to the big bet of $5 per hand. Also, each gambler was given a punchcard which was used by the casino to track daily buy-ins, which were capped at $200 per person. Just an interesting reminder of how the gambling legalization fight is actually rather recent, and the anti-gambling moralists still remain a strong force to be reckoned with in the imminent online gaming political battles.

[FN5] The lead appellate attorneys for the racetracks were Mark McCormick and Edward Mansfield. At the time of the RACI litigation, McCormick was a retired former justice of the Iowa supreme court. Mansfield was a prominent appellate attorney who was subsequently appointed to the Iowa supreme court. Both were members of a large Des Moines law firm started by David Belin, former legal counsel to the Warren Commission that investigated the assassination of President John F. Kennedy (Belin was renowned for his vigorous defense of the Commission's conclusion that Lee Harvey Oswald acted alone). When asking a state supreme court to sidestep an explicit ruling of the U.S. Supreme Court, it doesn't hurt to have a couple of heavyweight attorneys in your corner.

[FN7] A good argument could be made that online gaming revenues should have a lower tax rate in that online gaming places less stress on the community (i.e., no traffic or "urban blight" issues, less demand on fire/police resources, and creation of higher skilled, higher compensated jobs) when compared to traditional casinos.

August 15, 2013

Last week, the Second Circuit Court of Appeals issued its much-anticipated appeal decision in United States v. DiCristina. Although sharply disappointing to poker players, the Second Circuit's reversal of Judge Weinstein's pro-poker decision was predictable and straightforward. Excellent coverage and analysis of the appeal decision can be found at these poker media sites:

The above sources provide a thorough discussion of the appeal decision. For what it's worth, and in the interest of closing the circle on my prior analysis of the DiCristinadistrict court decision and appeal, here are my thoughts on the Second Circuit's decision.

A. State law defines gambling for IGBA violations.

The essence of the Second Circuit's ruling is that state law defines "illegal gambling" for purposes of establishing a violation of the federal Illegal Gambling Business Act (IGBA). The crux of DiCristina's argument was that the IGBA had an independent definition of gambling (based on a "predominate factor" analysis), and thus not all gambling illegal under state law was illegal gambling under the IGBA. This was an essential premise for Judge Weinstein's analysis of the "game of skill" argument because everyone involved in the case—DiCristina, the U.S. attorneys, Judge Weinstein, and the Second Circuit—agreed that poker is illegal gambling under New York state law. Thus, for the court to even reach the "game of skill" argument, the court first had to find that the IGBA's definition of "illegal gambling" was both different from and narrower than the definition used in New York state law. In other words, Di Cristina could only win if it were possible for certain kinds of gambling, including poker, to be illegal under state law but outside the scope of the IGBA.

In a relatively brief and workmanlike analysis, the Second Circuit concluded that the plain language of the IGBA did not support DiCristina's argument. The court determined that the IGBA has only three elements: a) a gambling business operating in violation of state law; b) five or more people involved in the business; and c) substantially continuous operation for more than 30 days or gross receipt in excess of $2,000 in any single day. There was no dispute DiCristina's poker operation violated the latter two points. Further, as noted above, DiCristina had also conceded poker was illegal under New York law, a concession both Judge Weinstein and the Second Circuit noted was well-established by New York state appellate case law.

The Second Circuit found that DiCristina and Judge Weinstein erred in attempting to add a fourth element to the mix by requiring the predicate gambling act to also meet a specific definition found in the IGBA:

(2) “gambling” includes but is not limited to pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein.

The Second Circuit found that this subsection was not a definition of "gambling", but rather was merely an illustration of the types of gambling businesses covered by the IGBA. The court noted that this subsection (2), unlike subsections (1) and (3), did not use the phrase "'gambling means", even though an earlier draft of the statute considered but rejected by Congress used the word "means" in subsection (2). Also, the court observed that subsection (2) was not defining gambling but rather was focused on gambling businesses. Looking at subsection (2), it does not actually list illegal games, but rather lists types of activities—e.g., "bookmaking" or "conducting lotteries"—that profit from illegal gambling. Given the plain language of the statute, the court concluded that operating a poker room was clearly an illegal "gambling business" under New York state law and thus was illegal under the IGBA so long as the IGBA's size and scope requirements were met.

The Second Circuit also made a significant observation that undercut Judge Weinstein's finding of ambiguity in the IGBA definition of "gambling":

We note that the District Court’s analysis, which turned on the question of whether skill predominates in a particular game, would, as the District Court acknowledged, “require ‘an ad hoc analysis of how similar or dissimilar the game was to those listed in IGBA’s list of examples,’ creating an ‘extraordinarily complex and unpredictable approach to the statute.’”

In other words, the analytical approach advocated by DiCristina and adopted by Judge Weinstein—requiring an independent analysis of the predicate gambling offense under the IGBA—actually would inject a significant element of ambiguity into the IGBA. Relying on state law alone to define illegal gambling for purposes of the IGBA is less complicated and provides individuals with more clarity as to whether their business activities are covered by the statute. By finding that the IGBA had only three elements, and by rejecting Judge Weinstein's determination that "gambling" was an additional element to be analyzed under the IGBA, the Second Circuit found there was no ambiguity as to whether operating an illegal poker room was a violation of the IGBA.

Finally, the Second Circuit rejected DiCristina's argument that whether poker was "gambling" under the IGBA was an issue for the jury to decide. Generally speaking, issues of law are for the court to determine, while issues of fact are decided by the jury. DiCristina argued that whether poker is gambling under the IGBA was a mixed question of law and fact, and thus should have been submitted to the jury rather than decided by the court. The Second Circuit rejected this argument, finding that the issue of whether poker is gambling under the IGBA is a pure issue of statutory construction which would not vary based on the facts of a particular case. This argument was a long shot by DiCristina, but the court's conclusion is still important because in future cases defendants will not be able to request that the issue of whether poker is gambling be submitted to a jury (which would presumably be more sympathetic to the "game of skill" argument). Instead, whether poker is illegal gambling will continue to be determined by the courts, where poker players and the "game of skill" argument have not had the best track record.

B. "Game of skill" analysis found to be irrelevant.

Poker players were ecstatic about Judge Weinstein's ruling which found poker to be a "game of skill". On appeal, however, because the Second Circuit determined that state law governs whether poker is illegal gambling, and because New York state courts have held that under state law operating a poker room is illegal, the Second Circuit noted that Judge Weinstein's lengthy "game of skill" analysis was utterly irrelevant to determining whether the IGBA had been violated. In fact, the Second Circuit engaged in no analysis of the "game of skill" argument at all, other than noting that the argument had been raised, and then brushing it off by finding the argument was "inapposite" in the context of the IGBA. So, the vast majority of Judge Weinstein's 120 page decision was simply ignored by the Second Circuit.

C. The Second Circuit's ruling was not a surprise.

Back in June, several members of the poker media attended the DiCristina oral argument before the Second Circuit, as did representatives affiliated with the PPA (Online Poker Report and Diamond Flush Poker both posted excellent summaries of the argument). Post-argument comments ranged from upbeat to gushing. A consensus narrative emerged that the pro-poker attorney had scored a solid knockout against the bumbling Assistant United States Attorney. Yet, less than two months later, the Second Circuit awarded the United States a decisive win. So what happened?

First, in modern appellate litigation, the importance of oral argument is wildly overestimated by the press and the public. In fact, most appellate cases at both the state and federal levels are submitted solely on written briefs, without argument. Further, even in cases where argument is granted, oral argument is rarely determinative of the outcome of the case. At best, oral argument offers attorneys an opportunity to respond to judges' concerns about policy implications of various rulings. But in most cases, oral argument is simply garnish on the main arguments raised in the parties' briefs. [FN1].

In DiCristina, the Second Circuit issued its decision less than two months after oral argument. This suggests that the court was predisposed to rule against DiCristina based on the briefs, and nothing was said at oral argument that caused any of the judges to reconsider that predisposition. To observers, the attorney for DiCristina may have handled the panel's questions better, but the judges weren't grading on style, they were looking for any issues that they might have overlooked in the briefs. Oral argument satisfied the judges that they understood the issues raised in the briefs, and thus ratified their pre-argument inclination as to how the case should be decided.

Several factors made the United States' position a heavy favorite on appeal. First, as I noted previously, Judge Weinstein is a judge with a history of being reversed for going outside the judicial mainstream in some criminal law cases. In a legal Catch-22, DiCristina needed to draw a trial judge like Judge Weinstein who would be open to his novel "game of skill" argument. Yet having such a judge rule in his favor immediately raised red flags at the appellate level. The fact Judge Weinstein needed 120 pages for his analysis of a simple statutory construction issue likely only waved those red flags harder.

The Second Circuit clearly had trouble accepting Judge Weinstein's analysis. In order to reach the "game of skill" argument, Judge Weinstein had to find a way around a significant amount of contrary precedent. The Second Circuit was simply unwilling to make the same analytical leap. The Second Circuit noted that prior case law in the Second Circuit (United States v. Gotti) established that poker—albeit video poker—could be a predicate offense under New York law, and further established that IGBA violations were based on state gambling law without further independent analysis of whether a particular activity was "gambling" under the IGBA; the court noted that the Ninth Circuit also interpreted the IGBA in the same manner. The Second Circuit further noted that the Third Circuit had ruled in United States v. Atiyeh that an IGBA violation could occur even without participation in the gambling activity, so long as the defendant participated in the gambling business. Finally, the Second Circuit noted that numerous federal Circuit Courts of Appeal had affirmed IGBA convictions predicated on gambling activities which were not specifically identified in the IGBA, but were violations of state law, including poker, video poker, blackjack, gin rummy, and bingo.

The Second Circuit also cited to an interesting federal district court decision from Guam, United States v. Hsieh, decided just two months prior to oral argument in the DiCristina appeal. The judge in Hsieh specifically analyzed and rejected Judge Weinstein's analysis of the IGBA in denying a motion to dismiss an indictment for running a poker business in violation of the IGBA. Although the Second Circuit only cited Hsieh once as part of a string cite of cases, even a cursory reading of Hsieh reveals its analysis had a profound influence on the Second Circuit's DiCristina decision. In fact, the influence of Hsieh on the Second Circuit's DiCristina opinion is so pronounced that in a non-judicial context one could argue that the Second Circuit effectively plagiarized the Hsieh decision. In any event, Hsieh is an excellent example of mainstream judicial analysis of the IGBA which highlights how far out of the mainstream Judge Weinstein's decision rested, and how difficult a task DiCristina's attorneys faced in attempting to defend Judge Weinstein's ruling on appeal.

Finally, both the facts of the case and the policy implications of Judge Weinstein's analysis likely heavily influenced the Second Circuit's ruling. At the end of the day, DiCristina was not some local businessman who had inadvertently run afoul of an obscure federal regulation in between attending Chamber of Commerce meetings and sponsoring high school athletic teams. DiCristina admitted he had run an illicit, unlicensed, untaxed poker room for a profit, complete with security cameras and guards, knowing it was illegal under state law—hardly the portrait of a sympathetic defendant, and certainly far removed from a simple home game (which the court specifically noted would not trigger the IGBA). Further, if the Second Circuit ruled in favor of DiCristina, the door would be opened to underground poker rooms across the country operating free from fear of prosecution under the IGBA, and with the potential additional evils of racketeering, corruption, and money laundering (remember, the IGBA was enacted in response to gambling run by organized crime groups). Although these considerations did not dictate the Second Circuit's analysis, judges are always sensitive to the potential impact of their rulings when considering novel legal arguments.

In the end, the Second Circuit's DiCristina decision followed the easiest analytical path. Asking the Second Circuit to follow Judge Weinstein's tortured analysis in finding a poker loophole in the IGBA was simply too ambitious a goal, too heavy a lift for poker advocates.

D. DiCristina has no chance at prevailing on further appeal.

When a party is deeply dedicated to a case, it is common to hear them rehtorically claim they will "take it all the way to the Supreme Court!" if necessary to get justice. Many poker players have suggested DiCristina should appeal, and the PPA has declared itself ready to support DiCristina in a further appeal. The only problem? DiCristina is plum out of viable appellate options.

Technically, DiCristina has two avenues of further appeal available. The first is to file a petition for en banc review by the full panel of active judges sitting on the Second Circuit (roughly 13 judges total, depending on retirements, recusals, and other vacancies). The second is to file a petition for writ of certiorari with the U.S. Supreme Court. The critical and insurmountable obstacle facing DiCristina is that both of these appellate options are discretionary with the courts, not a matter of right.

Looking first at the U.S. Supreme Court, the Court receives in excess of 7,000 petitions for writs of certiorari every year, yet takes fewer than 100 cases. Even after adjusting for the in forma pauperis petitions filed by indigent criminal defendants and prisoners which are much less likely to be granted cert, the Supreme Court still grants cert in less than 4% of cases. The Supreme Court is not interested in merely correcting legal errors—that is the role of the Circuit Courts of Appeal and state appellate courts. Instead, the Supreme Court's task is to select cases which either pose important questions of federal law or which resolve significant conflicts between lower appellate courts. In this case, the Second Circuit ruling in DiCristina is consistent with the other Circuits in looking to state law to establish a predicate IGBA offense, and thus the Supreme Court would likely see no reason to step in to review the decision. Ironically, had the Second Circuit affirmed Judge Weinstein's decision, the resulting Circuit split would have made DiCristina a much more likely candidate for Supreme Court review. But as it stands, DiCristina will not be the case where the Supreme Court wrestles with the finer points of variance and expected value.

Turning back to en banc review by the full Second Circuit, DiCristina's chances are actually worse than with the Supreme Court. Again, en banc review is discretionary with the Second Circuit. By rule, en banc review is disfavored and limited to cases where a panel decision either addresses an issue of "exceptional importance" or which conflicts with prior decisions of the Circuit or the Supreme Court. Statistics kept by the federal courts demonstrate that en banc review is exceedingly rare (p. 4); from 2000 through 2010, the federal Circuit Courts decided over 325,000 appeals, and issued en banc decisions in only 667 (0.21%) of those cases. Over that same time period, the Second Circuit issued en banc decisions in only 8 out of 27,856 of its appeals (0.03%). The recent trend is even less favorable; in the twelve month period ending in September 2012, the Circuit Courts granted en banc review in only 59 of 35,095 appeals (0.17%). During that same period, the Second Circuit decided 3,448 appeals and never granted en banc review.

Stick a fork in DiCristina. This case is done.

E. DiCristina has only symbolic value for poker legalization.

Many in the poker community, including the PPA, were quick to point out that, because the Second Circuit did not reach the "game of skill" argument, the portion of Judge Weinstein's ruling declaring poker to be a game of skill when analyzed under the "predominate factor" test for gambling remained good law that can be cited in future cases in support of a "game of skill" argument. In technical legal terms, the case could be cited to another court as having been "reversed on other grounds"; i.e., that the appellate court did not reverse the trial court's decision on the "game of skill" issue. [FN2].

The problem with grasping for this silver lining is that there are different weights given to "reversed on other grounds" citations. The stronger use of this type of citation is where the appellate court implicitly endorses a trial court decision on one issue, but reverses the trial court on another issue. For example, an appellate court might say something like, "Although we agree with the trial court's ruling on the admissibility of the expert testimony, we find that the trial court erred in the calculation of damages, and thus we must reverse and remand for a new trial as to damages only." In such a case, even if the appellate court confines its discussion to the damages issue, the appellate court has endorsed the trial court's evidentiary decision as being correct.

By contrast, a much weaker use of the "reversed on other grounds" citation occurs when, as in DiCristina, the appellate court is faced with several issues, but only analyzes one issue because it is dispositive of the case. The remaining issues are not analyzed by the appellate court, and there is no implication of endorsement of the trial court ruling as to those issues. In such a situation, any citation to the trial court decision is of limited value, carrying at best the same weight as any federal district court decision which has not been appealed, but with an asterisk because the cited decision was actually reversed on appeal.

It is hard to imagine a court case where Judge Weinstein's DiCristina decision will play a significant role in a "game of skill" challenge to any gambling law. Other anti-gambling federal laws such as UIGEA, RICO, and the Travel Act are like the IGBA in relying on a violation of state gambling law as an element of or predicate offense for a violation of federal law, rendering Judge Weinstein's ruling irrelevant. In many states, poker is explicitly defined as gambling by statute or regulation, or has been found to be gambling pursuant to case law, again rendering Judge Weinstein's ruling irrelevant. In those states where poker's status under state gambling laws has not yet been established, Judge Weinstein's DiCristina decision will be competing with a number of other recent state appellate court decisions which have considered and rejected the "game of skill" argument (all of which had technical evidence and expert testimony about the skill element of poker, and most of which involved the PPA as amicus curiae). [FN3]. Considering that gambling issues are generally a matter of state law, and given that state appellate court decisions are generally given more weight than federal district court decisions (particularly on issues of state law), state appellate courts confronted with pro-poker "game of skill" arguments in the future will likely give Judge Weinstein's DiCristina opinion little consideration. [FN4].

The legacy of Judge Weinstein's DiCristina decision will most likely be as the Baxter v. United States of the modern poker era. Baxter, decided in 1986, is another federal district court case which held that poker was a game of skill for purposes of federal law, albeit a federal tax statute. Within the poker community, Baxter has long been touted as a significant legal victory. The reality is that Baxter was actually an obscure decision of little or no consequence to the issue of poker's legal status. Like Baxter, Judge Weinstein's ruling in DiCristina is ultimately nothing more than a nice little vanity award, soothing the bruised egos of poker players who crave mainstream respect.

The course of the DiCristina litigation reminds me of the Cinderella fairy tale. Poker players feel like their game does not get the love, attention, and respect it deserves. Then, Judge Weinstein waved his magic wand and declared poker to be a game of skill. Suddenly, poker had attained its rightful place in the world. Happy days! But, the magic could only last so long. Cinderella's fun at the ball ended when the clock struck midnight, while the DiCristina poker celebration ended with the Second Circuit's decision.

The only problem with this analogy? There is no Prince Charming on the horizon looking to sweep poker players off to happily-ever-after.

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[FN1] Appellate arguments are easily my favorite part of being a litigator. So it pains me to admit that in most cases my argument is unlikely to materially affect the outcome of the appeal. Still, that 15-20 minutes in front of a "hot bench" (a panel of appellate judges with numerous questions) is always a thrilling experience.

[FN2]. For those of you curious how this type of citation would look in a legal brief:

Interestingly, there is also a legal citation form, "affirmed on other grounds", typically seen where a party may have two or more paths to victory on appeal, and the appellate court chooses a different analysis to reach the same conclusion as the trial court.

[FN3]. Recent state appellate court decisions which have rejected the "game of skill" argument for poker include:

Town of Mt. Pleasant v. Chimento (South Carolina Supreme Ct. 2012) (my discussion) (much like the Second Circuit's decision in DiCristina, the South Carolina Supreme Court found that the "game of skill" argument was irrelevant to determining whether poker was included in the state's anti-gambling statute).

Additionally, the PPA pressed a "game of skill" argument in Colorado. A district court ruled that poker was defined to be gambling under Colorado law and thus the "game of skill" argument was irrelevant. The Colorado supreme court declined to accept the PPA's appeal.

[FN4]. Whether the PPA should continue forward with its quixotic "legalization by litigation" strategy in light of the DiCristina appellate decision is a question for another post. However, my pre-DiCristina thoughts are HERE and HERE.

July 02, 2013

Last week, I managed to squeeze some poker into my busy vacation schedule of chaperoning drunks around Vegas. As I was taking advantage of an excellent Bellagio room rate, I wanted to keep my play focused on MGM Megalith rooms, so I strolled over to Aria one morning to check out the action.

With the WSOP in town, Aria's poker room was humming, with maybe ten tables running by 11:00 a.m. and long lists for $1/$3 and $2/$5 NLHE, as well as $1/$3 PLO. Not feeling up for the roller coaster of gamboooling that early in the day, I put my name on both the $1/$3 and $2/$5 NLHE lists, figuring I would play whichever game opened up first.

The floor soon opened a new $2/$5 NLHE table, so I vaulted to the top of that list. Shortly after, I was called for a spot at an established $2/$5 NLHE game. As I approached the table, it was pretty obvious this was a game that had run all night, with several players having wads of $100 bills and stacks of green and black chips in play. A glance around the table confirmed that this was not the game I was looking for; eight players, all in their 20s, all wearing hoodies and sunglasses. Yes, I had stumbled into a nest of WSOP pro-wannabes. So I pulled $400 out of my pocket and nodded when the floor asked me if I wanted to remain on the $1/$3 NLHE list.

Working on the assumption the table would play loose and aggressive, I vowed to play tight for an orbit or two to feel out the exploitable spots. It's good to have plans.

First hand, I was in the big blind. Action folded to hijack who raised to $15. Button thought and smooth called. Small blind called. I looked down to find 9h8h. Well, I would complete the action, and my cards were soooooted, so of course I called.

Flop was JhTh4d. Yahtzee!

I checked, assuming Hijack would c-bet, allowing me to check-raise with my monster draw and take down a nice first pot. Hijack did not disappoint, auto-betting $40. But then Button threw a monkey wrench into my plans, thinking a bit before raising to $110. Small blind insta-folded. Yikes! Here's where not knowing the table really makes poker tough. Was Button a tight player, raising with strong hands like sets, and top two pair? Or was Button betting top or second pair, or maybe a draw of his own, albeit bigger than mine, say the nut heart draw, KQ, or even something like AhQh? Or was Button just aggro-barreling with an underpair or air, leveraging a night of plays and reads of Hijack in an attempt to steal a pot?

After a bit of thought, I decided my draw was too strong to fold against two obviously aggro opponents. I pushed all-in, and was rather indifferent to whether either or both players called. Hijack snap-called, and Button nearly beat him into the pot, going all-in for maybe an additional $30. Hijack auto-called, and we were off to the races.

Just then the floor announced a new $1/$3 NLHE game starting at the table next to our table, and my name was called for the game. I watched as the board ran out. Turn—Qd. Donkey Kong! Well, unless I was up against AhKh ... Just so the board didn't pair, I had a shot. River—Qs. Ruh roh, Rooby!

I had a feeling I was beat somehow, somewhere. Still, I rolled my hand, and channeled my best Santa Claus drawl, announcing, "I have ... straight." My opponents stared at each other, and I started to feel a little better when Hijack asked the dealer, "Is there a side pot?" The dealer confirmed there was a side pot, and Hijack showed pocket Kings. Button looked disgusted, but mucked without showing. I suspect Button had JT for altos dos pairs and was counterfeited by the running Queens.

As the dealer broke down our stacks to figure out how much I had won, I strolled over to the new $1/$3 game and put down my player card to lock up a seat. I grabbed two racks on my way back to the table, just as the dealer was pushing me a ~$1,200 pot. I tossed the dealer three red chips, then racked up the rest of the pot. As the table stared at me, I politely said, "Good playing with you gents, but my game is starting." Then I headed over to my new table where I had a lucrative session before heading back to Bellagio.

June 30, 2013

This past week I spent four days in Vegas on a big group trip which included my significant other and another ten of our friends. I initially booked three rooms at Venetian based on a good email / players' club offer, but switched over to Bellagio which came through a week prior to our trip with an even better offer. So, out of convenience and a desire to snag future room rate offers from the MGM Megalith, I split my poker playing time between Bellagio and Aria. Incidentally, for those of you looking to book a nice hotel for a Vegas poker trip, the Aria poker room is actually a short, easy walk from the Bellagio spa tower (the tower past the conservatory and on the southwest corner of the property) through Vdara and into the north valet entrance of Aria, making the Aria poker room nearly as accessible as the Bellagio poker room.

I had not played poker at Bellagio in over a year, and I'm honestly not sure why. Historically, I have found Bellagio to be a consistently profitable place for me to play, with some of the softest $2/$5 NLHE games in town, along with a top-notch (if occasionally snooty) staff and top shelf booze. But since Aria's poker room opened, my poker play has been predominately at Aria and Venetian, with significant cameo appearances at Mirage and Planet Hollywood. Most of the reason for dropping Bellagio from my regular poker rotation was that Bellagio really did not care about low-stakes players, treating them mostly as an annoyance. After this trip, however, Bellagio has certainly earned a promotion back into my Vegas poker lineup.

Although Bellagio still caters to the highest stakes players—even midweek during the WSOP the room was spreading multiple $25/$50 PLO games as well as limit and no-limit hold 'em and mixed games with blinds from $10/$20 up to $800/$1600—the room's management, floors, and dealers seem to have for the most part made their peace with lower stakes players, welcoming hordes of poker players looking to play $1/$3 and $2/$5 NLHE. In fact, those low stakes players now routinely fill nearly half of the Bellagio's 40 poker tables, even as Doyle Brunson continues to hold court in Bobby's Room and name pros like Erick Lindgren drop by to get into the high-stakes PLO games.

During my lengthy absence, the Bellagio poker room management had switched the $1/$2 NLHE game to a $1/$3 game, with a commensurate rise in maximum buy-in from $200 to $300. This is a rule change I applaud as it allows deeper stacked play, not to mention encourages bad players to put more money into play. However, I also discovered another, less welcome rule change the hard way.

During my first session, I was seated at a $1/$3 NLHE table just behind the button. The dealer asked me if I wanted to "post in"—i.e., post a $3 big blind to receive a hand—or wait for the big blind. Now this process of posting in is common in many (though not all) Midwestern casinos. But in my experience, no other Strip poker room requires posting in; instead, a player is simply dealt in without posting, unless the new player is in the blinds, in which case the player either posts the blinds in turn or waits and is dealt in for free (i.e, without posting) after the button passes. Still, it was only $3, so I didn't think much of the posting rule at the time.

During my next session at Bellagio, I was sent to a $1/$3 NLHE game where my seat was between the small blind and the button. Generally, poker rooms will simply deal around the new player in this spot, then on the next hand pass the button past the new player and deal in the new player. Some poker rooms, however, allow the new player to "buy the button" by posting both the small and big blinds, allowing the button to move normally on the subsequent hand with the new player keeping the button and the blinds proceeding to the left naturally, albeit with a one hand interruption.

As I was unracking my chips, the dealer asked me, "Do you want to post in?" I wanted to give off the image of a fish eager to play—made easier because it was accurate—so I flipped in a $5 chip. A player in late position raised, I folded as did the rest of the limpers, and we moved on to the next hand.

Except the dealer moved the button past me. WTF?!?

Me: "Excuse me, I bought the button."

Dealer: "No, you just posted in."

Me: "No, I put out $5 to buy the button."

Dealer: "I asked you if you wanted to post in. You never said anything about buying the button. You could've bought the button, but you didn't put out $4."

Me: "I put out $5 to buy the button. Why on earth would I want to post in in the blinds without buying the button."

Dealer: "Some players just don't want to wait to play."

Although I was mildly annoyed, I let it go as it was a small issue in the grand scheme of things. Plus, there's really no benefit in continuing to argue over this type of issue when it's clear that not only wasn't I going to "win", there really wasn't any remedy for what was a simple misunderstanding. Eh, caveat emptor. Live and learn. Fool me once ...

Anyway, over the next four days, I witnessed over a dozen new players move into a spot to the left of the button under similar circumstances—in fact, considering many players leave the table when the big blind hits them, it is rather common for new players to move into that particular spot between the small blind and button. Every single time, the dealer asked if the player wanted to "post in"; not once did a dealer ask if the player wanted to "buy the button", even though buying the button is far more advantageous for the player.

I question why Bellagio, alone among the major Vegas poker rooms, feels the need to require players to post in to games. The only rationale for posting in is that a player should have to put some money into the game before being able to play, in order to prevent a player dealt in for "free" from hitting and running after winning a big hand before paying the blinds. But this rationale is incredibly weak. How often do players sit and play only a few hands, unless they get terribly unlucky? Also, even if an occasional player pulls a hit and run in the first orbit to avoid paying the blinds, they still have to put their chips at risk if they do play a hand. Finally, if the posting in rule is on the Bellagio's books because it is perceived as necessary for some reason for the high-stakes games regularly spread in the room, we're only talking one big blind per new player, hardly enough to affect the course of play regardless of the stakes of the game.

Nonetheless, if Bellagio is going to require players to post in, then why are Bellagio's dealers not offering new players in the blinds the additional option to buy the button? Buying the button is quite common in many poker rooms, while Bellagio is unique in my experience in permitting players to post in between the button and blinds. So, offering players the option to buy the button would prevent confusion. Further, buying the button is significantly more advantageous for players, so dealers should let players know that buying the button is also an available option, rather than asking only about posting in.

Look, the Bellagio's posting in rule ultimately doesn't have any significant impact on game play. It's more a quirky rule to be aware of, rather than a reason to avoid the room. Still, it's not the type of rule that is player-friendly, and the Bellagio still has some room to improve in that regard.

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ADDENDUM (30 June 2013; 1:16 CT): I just stumbled on a recent 2+2 thread that repeated rumors that David Sklansky's table jumping habits led to the Bellagio posting rule. Sklansky and Mason Malmouth both jumped into the fray to declare the rumor bogus (seeHERE, HERE, HERE, HERE, and HERE).

June 23, 2013

This week, the Second Circuit Court of Appeals heard oral arguments in the DiCristina poker case. The DOJ is challenging a federal district court decision which found that the Illegal Gambling Business Act (IGBA) did not apply to poker because poker is a game of skill and the IGBA only applies to games of chance. Poker media guru "Diamond Flush" posted an excellent summary of the arguments, which by all accounts went very well for the pro-poker side.

PokerNews published highlights of a discussion with PPA litigation director Patrick "Skallagrim" Fleming, which is well worth a read. Unfortunately, PokerNews dropped the ball on a couple of major legal issues:

A Circuit Court ruling that IGBA doesn't include poker would be a big victory for the legality of poker. As it's already been determined that The Wire Act doesn't apply to poker, the IGBA is the last federal law the DOJ interprets as making poker illegal and was at the center of the Black Friday indictments. Other charges of money laundering and violating the Unlawful Internet Gambling Enforcement Act were dependent on operating a poker business being unlawful under the IGBA.

....

The case is sort of a freeroll for poker. If the DOJ wins, it will be able to continue interpreting the IGBA to include poker as it has been. If DiCristina wins, the DOJ won't have any legal standing against poker on a federal level. There also seems to be very little chance that the court would overrule Judge Weinstein's finding that poker is a game of skill since it doesn't affect the appeal.

There are two significant errors here, which are somewhat interrelated. First, the money laundering and UIGEA charges in the Black Friday indictments were not solely predicated on the IGBA violation. Instead, the indictments were based on violations of both federal law and New York state gambling laws. Certainly having the IGBA found inapplicable to online poker would undermine the Black Friday charges, but a pro-poker decision in DiCristina would not negate the UIGEA and money laundering charges.

Second, and more significantly, it is simply untrue that "the IGBA is the last federal law the DOJ interprets as making poker illegal" and that a victory in DiCristina means "the DOJ won't have any legal standing against poker on a federal level." Of course, the UIGEA still prevents the transmission of money to fund online poker sites operating in violation of state law, and most states have laws which classify poker as gambling for purposes of gaming regulations. More to the point, however, is that the Travel Act—a breathtakingly broad statute targeted at criminal enterprises—very much remains in play. As I wrote when analyzing the federal district court ruling in DiCistina:

The [DiCristina] decision only interpreted the IGBA. There are other federal statutes that could still be used by federal prosecutors against businesses offering poker, most notably the Travel Act. Unlike the IGBA which contained its own definition of "gambling", the Travel Act simply relies on a violation of a state gambling law to establish the predicate offense. Also, note that the Travel Act prohibits use of "the mail or any facility in interstate commerce" to "distribute the proceeds of any unlawful activity" or "otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity". This arguably could mean that merely mailing checks, promotional materials, or awards to players could be a violation of the Travel Act. So far federal prosecutors have not used the Travel Act in any poker-related prosecutions (at least not to my knowledge), but that might change if they lose the IGBA as a tool because of this decision.

My words turned out to be prophetic (though my prophesy wasn't any more challenging than predicting that LeBron James would win multiple NBA titles). A mere three weeks after the district court decision in DiCristina was issued, the DOJ amended their Black Friday civil forfeiture complaint against PokerStars, Full Tilt Poker, Ultimate Bet, and various business entities and individuals associated with those sites to include a Travel Act violation as a basis for forfeiture of poker-related assets. So, although it's unclear where PokerNews was getting its legal information on this point, PokerNews' coverage was unquestionably inaccurate on a significant legal point.

Now, why does it matter if PokerNews got this legal point wrong? The biggest issue is that this kind of misinformation feeds into the poker community's collective misunderstanding of applicable law and raises unrealistic expectations, in particular an impression that a favorable appellate ruling will clear the way for legalized online poker on a national basis. If the Second Circuit affirms the district court's decision—and I certainly hope that it does so—the effect on online poker will almost certainly be rather modest. As I wrote in my previous analysis of the DiCristina district court decision:

Even if the [DiCristina] decision is affirmed on appeal, its impact on the poker legalization fight is likely to be minimal. In many states, whether poker is a game of skill is utterly irrelevant as poker is explicitly regulated as gambling. In other states where poker's status is not defined by statute, courts have already ruled that poker is gambling, and those courts are unlikely to reverse course after having decided the issue. The decision probably has little application to other federal gambling statutes because the decision is based on the IGBA's particular definition of "gambling". ... Most likely, the decision will ultimately have only symbolic value.

Now, I don't want to leave the impression that DiCristina is not important; it is unquestionably a significant case. In fact, if the Second Circuit affirms the district court's ruling, then the DiCristina case will have significance both in removing poker from the ambit of another federal statute, and in being the first appellate court decision finding poker to be a game of skill. Nonetheless, at the end of the day, even a win in DiCristina will have little discernible impact on the effort to legalize poker. [FN1]. That's a fight that will need to be waged on a state-by-state basis, at least for the time being.

[FN1] As I previously discussed, one potential major winner from a DiCristina win in the appellate court is PokerStars:

Because the decision is from a different court, it does not change the pending DOJ Back Friday criminal or civil forfeiture cases other than to make it marginally easier for the remaining defendants to leverage a better plea bargain or settlement because the DOJ's IGBA and associated money laundering charges are now in a somewhat weaker position. The Black Friday cases are ultimately more about the banking and financial shenanigans of those involved than the underlying poker businesses themselves. But the decision certainly strengthens the argument to be made by PokerStars to state gaming regulators that merely running an online poker business did not violate federal law. Even if the decision is reversed on appeal, PokerStars could still argue that if a respected federal judge thought that poker was not regulated by the IGBA, then they certainly had a good faith belief they were not violating the IGBA. Of course, there would still be the matter of PokerStars allegedly violating state gambling laws, the UIGEA, federal money laundering laws, and federal banking laws. But if the applicability of the IGBA and the Wire Act can now be called into question, it becomes easier to raise doubts about some of the other laws in the mix.

Unfortunately, appellate courts rarely move quickly. A decision will likely take three to six months to be issued. If so, then PokerStars will be denied an opportunity to rely on a potentially favorable appellate court decision as New Jersey considers PokerStars' application for a gaming license.

June 05, 2013

In the wake of a New Jersey judge lifting the temporary restraining order (TRO) which had blocked the potential sale of the Atlantic Club Casino to buyers other than PokerStars, PokerStars has declared they "remain committed to New Jersey". The judge's decision to lift the TRO less than two weeks after putting the brakes on the PokerStars-Atlantic Club breakup left some observers in the poker community baffled, while others have pondered what legal and business options remain viable for PokerStars in New Jersey. From a litigation perspective, PokerStars chances of salvaging the Atlantic Club deal look rather grim.

I. Appeal
Many in the poker community suggested that PokerStars appeal the judge's ruling. Unfortunately, as a matter of procedure, an appeal is a difficult option for PokerStars at this point in time. Generally speaking, a party has the right to appeal only after a case has reached a final judgment, which generally requires either a verdict after trial, or a dismissal or judgment entered on a motion (e.g., a motion to dismiss or a motion for summary judgment). The judge's ruling lifting the TRO is not a final disposition of the case, so PokerStars cannot appeal as a matter of right.

However, PokerStars could file an application with the state appellate court for permission to file what is known as an interlocutory appeal, or an appeal from a non-final ruling. Interlocutory appeals are strongly disfavored because appellate courts prefer cases to be fully litigated prior to appeal. This practice permits the evidentiary record to be fully developed prior to appellate review, and also allows potentially erroneous rulings by the court early in the case to be rendered moot by later developments in the litigation. Consequently, courts generally only grant interlocutory review when a party will suffer substantial prejudice from being forced to wait for a conclusion of the litigation process to have an erroneous ruling reviewed. Examples of situations where an appellate court might be inclined to grant interlocutory review include where a party claims the lower court lacks jurisdiction over the party or claim, or where a lower court has ordered production of privileged documents.

In the present case, the court's denial of PokerStars' TRO request is not a likely candidate for interlocutory review. In order to get a TRO, PokerStars had to convince the trial court judge that it was probable it would ultimately prevail on the merits of the claim. The trial court's denial of the TRO implies that PokerStars is unlikely to ultimately prevail, and thus the appellate courts are less likely to see a need to grant interlocutory review. Also, as a practical matter, appellate courts are more likely to grant interlocutory review of a trial court's granting of a TRO than a denial of a TRO; the imposition of a TRO is much likelier to prejudice a party than the denial of a TRO.

Still, the TRO in this case has some attributes that distinguish it from run-of-the-mill rulings and might make an appellate court interested in granting an interlocutory appeal. In particular, PokerStars may essentially be deprived of the benefit of its bargain if it proceeds to trial and wins, only to have had the Atlantic Club sold to a third-party in the interim. In an emergency telephone hearing on May 7, 2013—the day after PokerStars filed its complaint and the court entered the preliminary TRO—the judge specifically noted the "potential chaos" that might result if a TRO was not granted at least until he had the opportunity to review all of the parties' arguments and evidence on the merits. This same line of reasoning may make an appellate court more inclined to grant interlocutory appeal. Still, the trial court judge ultimately reviewed the parties' submissions and determined a TRO would not be appropriate, implying he felt PokerStars was less likely to ultimately prevail, which detracts from PokerStars' argument for a grant of interlocutory review.

If PokerStars decides to pursue interlocutory appeal of the judge's ruling, they would need to do so by this Thursday, June 6 (New Jersey Rule of Appellate Procedure 2:5-6 requires an appeal to be filed within 20 days of the district court's ruling), unless they file a motion for reconsideration with the trial court. However, appellate courts rarely move quickly, particularly in standard civil litigation arising from a commercial contract dispute. A certain period of time—possibly several weeks—will pass as the Atlantic Club resists the application for interlocutory appeal and as the court considers and issues a decision to grant the appeal; this decision is unlikely to be entered prior to the Division of Gaming Enforcement's (DGE) decision on PokerStars' application for a gaming license (a/k/a an Interim Casino Authorization or "ICA"). Then, unless the appellate court grants a stay and enters its own TRO pending appeal (again unlikely), several months will pass as the parties file briefs on appeal and the appellate court reaches a decision on the merits of PokerStars' request for a TRO. Also, because the judge's denial of the TRO would be weighed by the appellate court under a highly deferential "abuse of discretion" (a/k/a "arbitrary, capricious, or unreasonable") standard of review, PokerStars would be fighting an almost impossible uphill battle to win on appeal.

II. Fight On

If PokerStars decides not to pursue an interlocutory appeal—and their failure to file an application with the appellate court within a few days after the ruling suggests they do not intend to do so—PokerStars can still press on with their lawsuit against the Atlantic Club. However, continued litigation is probably a rather unsatisfactory option for PokerStars given its ultimate goal of becoming licensed in New Jersey and offering online poker in the state.

First, an interesting provision in the Purchase Agreement (Section 10.2(c)) states that the parties waive the right to a jury trial and agree to have any dispute heard by a trial court judge. The trial court judge has already ruled that PokerStars is unlikely to prevail on the merits. Unless some type of "smoking gun" evidence of improper behavior by Atlantic Club pops up—e.g., emails showing Atlantic Club was pursuing other buyers during the contractual exclusivity period—it seems unlikely the judge will change his mind based on a trial. Even if a different judge handles the trial, having a judge already weigh in on the merits of the case will give Atlantic Club a leg up at trial, as many trial court judges are reluctant to contradict another trial court judge absent a clear error. Frankly, the TRO skirmish in these types of lawsuits often decides the ultimate outcome, or at least gives the prevailing party substantial leverage going forward.

Further, a review of the actual Purchase Agreement demonstrates PokerStars is on shaky legal ground with respect to its claims. As I've discussed in greater detail previously, PokerStars' argument that the "Outside Date" used by Atlantic Club to terminate the deal violates New Jersey's gaming statutes is unlikely to carry the day. The remaining claims for promissory estoppel and unjust enrichment are equally weak in light of the express terms of the Purchase Agreement. With respect to promissory estoppel, PokerStars is claiming that Atlantic Club misled them into paying advances and incurring expenses in seeking a gaming license. Yet PokerStars was already required to do those very things by the contract. Similarly, PokerStars is claiming Atlantic Club has been unjustly enriched by keeping the advance payments and a termination penalty essentially equal to the total purchase price. But again, PokerStars agreed to those very terms in the contract. A court is unlikely to grant PokerStars equitable relief from the Purchase Agreement it negotiated and agreed to, absent evidence of actual fraudulent conduct by Atlantic Club. Courts simply will not invoke principles of equity to save a party from a bad deal of their own making.

Finally, the time and expense of proceeding to trial will be significant, particularly in light of the likelihood of prevailing at trial. Going through discovery, motions, and trial will easily cost PokerStars north of half a million dollars, and quite possibly well over a million dollars in legal fees alone (trust me, even in less pricey venues than New Jersey, a month of depositions will run over $200,000, and a week of trial can easily run over $250,000). Also, a trial date is likely more than nine to eighteen months away. If there is little chance of prevailing on the merits, the expense and hassle of continued litigation may well give PokerStars good reason to cut their losses, pay the termination fee, and walk away.

III. Pursue Other Options

PokerStars has been incredibly confident that the New Jersey gaming authorities would grant them a license; Isai Scheinberg even allegedly told Atlantic Club executives he felt there was a "90% chance " PokerStars would get a New Jersey license. At this point, given statements by Atlantic Club questioning PokerStars' qualifications for getting a gaming license, it seems unlikely PokerStars will put in additional money to resurrect the Atlantic Club purchase (if Atlantic Club would even entertain a sweetened offer from PokerStars).

Although PokerStars would need a physical base in Atlantic City to offer online poker, the Atlantic Club is only one option for PokerStars. PokerStars could continue to pursue a New Jersey gaming license with an eye toward purchasing another casino or even partnering with a casino to offer online poker. New Jersey certainly offers PokerStars better odds of being licensed than in other states, given its unique combination of poor economic conditions for the state's casinos coupled with the lack of any "bad actor" clauses in the state's online poker statutes. Thus, even though the Atlantic Club deal may be dead, New Jersey may well remain PokerStars' best opportunity to break into the regulated United States online poker market. The only question would be how much the failed Atlantic Club deal, including the Atlantic Club's incendiary comments about PokerStars' "criminal" connections, would impair PokerStars' ability to navigate the licensing process. Still, PokerStars will need to jump the licensing hurdle sometime, somewhere, if they want to operate in the United States, and New Jersey may well remain their best opportunity to do so.